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A two judge bench of the Supreme Court, in the case of Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited (decided on April 10, 2019) held that the arbitration clause contained in an agreement or conveyance is not separable from the said agreement or conveyance and hence, if such agreement or conveyance is insufficiently stamped, the court cannot appoint an arbitrator in the dispute in response to an application under Section 11(6) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”).

Garware Wall Ropes Limited (“Appellant”) entered into an agreement with Coastal Marine Constructions and Engineering Limited (“Respondent”) on which adequate stamp duty was not paid by the parties. Annexure to the agreement contained an arbitration clause, which provided for appointment of a sole arbitrator by the Appellant and Respondent jointly, in agreement. A dispute arose and the Appellant terminated the agreement. The Respondent sent a notice nominating a sole arbitrator, which was unacceptable to the Appellant. Hence, the Respondent approached the Bombay High Court, which appointed the same person as sole arbitrator. Aggrieved by the decision of the Bombay High Court, the Appellant approached to the Supreme Court and the following issue came up for determination:

What is the effect of an arbitration clause contained in an agreement which is insufficiently stamped?

The Appellant argued that regardless of Section 11(6A) of the Arbitration Act, which requires courts to only decide on prima-facie existence of an arbitration clause in an agreement, the Supreme Court’s decision in SMS Tea Estates Private Limited v. Chandmari Tea Company Private Limited [(2011) 14 SCC 66] (“SMS Tea Judgement”) would be applicable here. In SMS Tea Judgement, it was held that where there is an arbitration clause in an unstamped agreement, it cannot be acted upon, and the court should impound the documents and proceed with the Section 11 application under the Arbitration Act only after the necessary stamp duty is paid. The Appellant said that the Maharashtra Stamp Act, contained provisions similar to the Indian Stamps Act, 1899 (“Indian Stamp Act”) and hence the SMS Tea Judgment shall be applicable in this case as well since Section 11(6A) of the Arbitration Act does not interfere with the Indian Stamp Act.

The Respondent argued that an arbitration clause is independent from the agreement of which it is a part and hence it can be acted upon even if the agreement containing it is unstamped. Further, the Respondent contended that the Indian Stamp Act is a fiscal statute and Section 11(6A) of the Arbitration Act only envisaged courts to rule on the existence or non-existence of an arbitration clause, and not inquire into its substance or validity, leaving those questions to the arbitrator(s), in order to avoid a mini trial. In the present case, it was argued, the insufficiently stamped agreement would only cast a shadow on the validity of the arbitration agreement but its existence is beyond doubt, hence, the Bombay High Court was correct in appointing the sole arbitrator despite the agreement being insufficiently stamped. Further, an application under Section 11 of the Arbitration Act is to be disposed of within 60 days and if the court impounds the documents pending decision of revenue authorities, the 60 days period will lapse.

The Supreme Court analyzed its earlier decision in SMS Tea Judgement, and the introduction of Section 11(6A) of the Arbitration Act, which were the two pillars of basing the current decision. It was observed that under the Maharashtra Stamp Act, an agreement becomes enforceable in law only when it is duly stamped. It was further observed that an arbitration clause cannot be bifurcated entirely from the agreement it is contained in, as the stamp legislation applies to the entire agreement. Consequently, an arbitration clause would not ‘exist’ when the underlying agreement is not enforceable under law. Accordingly, the Supreme Court held that under Section 11 of the Arbitration Act, a court can impound an agreement if it is not stamped in accordance with the mandatory provisions of the applicable stamp legislation.

Parallel to these proceedings, a full bench of the Bombay High Court was seized of a matter with a similar question of law. Just a few days before this judgment, the Bombay High Court in the case of Gautam Landscapes Private Limited v. Shailesh Shah (decided on April 4, 2019), held that for appointment of arbitrators under Section 11 of the Arbitration Act, it was not necessary for courts to await the adjudication of stamp duty by stamp authorities in cases where a document was not adequately stamped. The Supreme Court held that this judgment is not good in law, and thereby set it aside.
Applying the doctrine of harmonious construction, the Supreme Court interpreted the scope and application of section 11(13) of the Arbitration Act read with Sections 33 and 34 of the Indian Stamp Act, and laid down a procedure to be followed by courts and stamp authorities when the agreement in question is unstamped. It was held that the Bombay High Court must impound the agreement which does not bear the requisite stamp duty.

Thereafter, the unstamped or insufficiently stamped agreement should be handed over to the relevant authority under the relevant stamp legislation, which will decide the issues relating to stamp duty and penalty as expeditiously as possible, and preferably within a period of 45 days from the date on which the authority receives the agreement. Once the requisite stamp duty and penalty is paid by the parties, the parties can bring the instrument to the notice of the High Court. The High Court will then proceed to expeditiously hear and dispose of the Section 11 application under the Arbitration Act.

The Supreme Court allowed the appeal and held that a court cannot appoint an arbitrator when the contract containing arbitration clause is insufficiently stamped. In light of the same, the matter was remitted to the Bombay High Court for adjudication.

Vaish Associates Advocates View
The Supreme Court has settled the position on a long-drawn issue of law, which was creating confusion due to contrary positions in different High Courts. The Supreme Court has balanced the fiscal interests of the country, while at the same time ensuring that the efficacy of alternate dispute resolution is not disrupted in the process.

However, the primary concern here is the efficacy of the procedure prescribed for impounding the instrument and appointment of arbitrator(s) thereafter. The revenue authorities may not be able to adhere to the 45 days timeline, which may ultimately lead to a major delay in the arbitration proceedings.

For more information please write to Mr. Bomi Daruwala at [email protected]